Eco 550 Week 5 Homework Chapter 8 Problem 2 and 16b

AnHomework Problems for Chapter 8

2 Probably the same sorts of factors that are affecting grocery stores. Among others, it is easier to find out about specialists and visit or communicate with them, and lower transaction costs in markets allow the specialists to charge competitive prices. Online shopping has made tremendous inroads into department store sales.

16a I provided a set of notes on how to solve for the equilibrium price and quantity in the supplemental material for Week 5. Equate demand and supply and solve for P and Q. Initial demand is Qd = 50 – P and supply is Qs = -7 + 2P. Solving gives an equilibrium price of $19 and equilibrium quantity of 31. Shift the demand curve down by $18; the demand curve net of transaction costs is Qd = 32 – P. Set this equal to supply as above and get a $13 equilibrium price net of transaction costs.

16b The intermediaries save buyers $8 in transaction costs, so the demand curve shifts to Qd =42 - P. Price received by sellers rises from $13 to $16.33, output traded from 19 to 25.67 units. Sellers will be unwilling to pay $8 per unit for the intermediary who reduces buyers' transaction costs by $8, since price received by sellers rises by less than $8. The maximum they would pay intermediaries is approximately $3.33 per unit.

16c The answer stays the same, since what happens here is that sellers are paying buyers for the intermediary service, rather than paying the actual intermediaries.